How to Deal with a “Bretton Woods Moment”

The world economy is in serious disarray. What can we do about it?

It has become commonplace for political leaders and pundits to pronounce the need for a “new Bretton Woods” to solve the problems of our broken world economic system. The cry evokes memories of the monetary conference in Bretton Woods, New Hampshire, in 1944, during which all the allied countries fighting the Axis in World War II created the rules-based international financial system that produced unprecedented economic growth in the decades that followed the war. But circumstances have changed, and Bretton Woods—the only truly successful global economic meeting of the twentieth century—cannot be reproduced. What would a positive response look like today?

Sometimes the Bretton Woods rallying call reflects a desire to restore discipline by imposing new rules (or reviving old ones) on trade and finance across national borders. Sometimes it is a call for new institutions to deal with new challenges such as climate change or the rise of pervasive digital technology. Sometimes it is just a way of summarizing the urgent need for restoring international cooperation in the wake of rising populist nationalism. In most cases, however, these pleas lack both a clear goal and a roadmap for getting there. As it happens, we can go a long way toward closing those gaps by studying how and why the original Bretton Woods conference succeeded in 1944.

When the American economist Harry Dexter White began in 1941 to plan what would become the Bretton Woods conference, the global situation was far more dire than it is today. War was raging in Europe and Asia; the depression of the 1930s had decimated economic production, employment, and trade; and currency instability was making it impractical to accept or hold any country’s currency other than one’s own. There was simply no model or template to draw on for thinking about how to design a system for restoring prosperity and peace.

A strikingly original thinker, White—the chief economist in the U.S. Treasury—began by setting out a clear vision of what had to be achieved and what steps would have to be taken to get there. Fundamentally, postwar prosperity would require a renewal of international trade. If major countries instead tried to pull inward, a return of the Great Depression would be all but inevitable. Trade would require cooperation, and cooperation would depend on the acceptance of rules and the development of institutions with the power to enforce them. The challenge that White faced was to get political leaders in the United States and across the broad alliance of countries to focus on the problem and agree on a strategy that could be completed after the war was won.

White had four main insights for this process. He had to fight to get each of them accepted, and those battles hold lessons for today.

First, the solution must be devised while the crisis (in that case, the war) is still present. If leaders wait for a more comfortable moment, the incentive to cooperate and accept compromises will be undermined. As evidence, consider that when negotiators decided to postpone consideration of an international trade organization during World War II so that they could focus on creating the World Bank and the International Monetary Fund, discussions broke down, and the World Trade Organization did not get established until fifty years later, in 1994. Nonetheless, senior officials in the U.S. State Department were initially adamant that none of White’s plan could or should be done until after the war. It took several months before they gave way and allowed planning to go forward. The multiple crises of 2022 might persist, or they might diminish. Waiting until the situation clears could be fatal.

Second, all potential participating countries must be engaged in discussions as early and as fully as possible. In 1942-43, British negotiators, led by John Maynard Keynes, argued long and hard for a bilateral deal between Britain and the United States, with other countries to be invited in only after the system was already designed. Many U.S. officials shared that view, but White understood instinctively that most countries would be loath to commit to a deal that had been cooked up by great powers without the opportunity to plead for their own national interests. Countries as diverse as Canada, China, France, India, Mexico, and the Soviet Union all contributed to the final design.

Today the dominant rivalry on economic governance is between the United States and China. Resolving that conflict cannot be achieved bilaterally, because national interests are too conflicting. If the U.S. government wants the existing rules-based world order to survive, it must seek the views and the support of a broad alliance. Taking a multilateral approach was a tough sell in the 1940s when the United States was by far the dominant economic and financial power. In the current multipolar environment, the need for cooperation is more obvious, but achieving it remains challenging.

Third, whatever form a new system might take, it must reflect the world’s practical realities. In 1944, a key fact was that the U.S. dollar had become the pre-eminent currency for global trade. The British knew that the days of dominance by the pound sterling were over, but they wanted to replace it with a new international currency and sideline the dollar. Even White’s boss, Treasury Secretary Henry Morgenthau, Jr., wanted to create such a stateless currency, apparently out of concern that a system based on the dollar would put too much pressure on the value of the U.S. currency. White understood that insisting on a hegemonic role for the dollar was likely to generate a political backlash. His solution was to retain a strong link between the dollar and gold for international settlements so that countries could choose whether to hitch their stars to the dollar or to gold. Domestic monetary policy could be safely delinked from gold, but he feared that foreign institutions and investors would be reluctant to hold dollars if they were no longer convertible into a universal asset. With that assurance, the postwar system was—and had to be—based essentially on the dollar.

The current global financial system is a curious mix of dollar hegemony and multipolar settlements. The IMF recognizes five currencies—dollars, Euros, pounds sterling, yen, and renminbi—as equally suited for its lending and other official transactions. The portion of international trade and finance conducted by or through the United States is a small fraction of what it was in the 1940s. Nonetheless, a majority of cross-border transactions are denominated in dollars, and a majority of official reserves are held in dollar securities. If the hope for a new Bretton Woods is that it will lead to a more stable and sustainable financial system, negotiators will have to find a way to resolve this disconnect.

Fourth, notwithstanding the need for consultation and compromise, the resulting system must be founded on strong principles. For the postwar system, White argued that the settlement of payments balances between national governments had to become open and multilateral. In the 1940s, if, say, Brazil accumulated pounds sterling by running a trade surplus against Britain, it could not readily convert those pounds into dollars to buy U.S. exports. That system benefited Britain, which oversaw a vast network of countries that used the pound as their currency or tied their own currencies tightly to it. The British resisted committing themselves fully to multilateralism, but White held his ground. In the end, White devised a compromise that gave participating countries several years to unwind their bilateral trade relationships. The Bretton Woods system did not become fully realized until the late 1950s, but in the meantime, it grew gradually in effectiveness and importance. Today, the existing rules-based system must adapt to serve the interests of China and other rapidly growing economic powers, but that need not lead to an abandonment of basic principles including the preservation of transparency, openness, and fairness in international financial relations.

It is too early to specify what a new world economic order might encompass, other than in general terms: a revival of cooperation, an acceptance of effective updated rules governing trade and finance, and new or modernized institutions to deal with the challenges of the twenty-first century. The lessons of Bretton Woods might not reveal the endpoint, but they do illuminate the pathway to it.

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James Boughton is a former official historian of the IMF. His latest book is Harry White and the American Creed: How a Federal Bureaucrat Created the Modern Global Economy (and Failed to Get the Credit), Yale University Press, 2021

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Revealed: New Insight into What Really Drives the Stock Market

If watching the stock market is giving you that old sinking feeling, you’re not alone. Inquiring minds want to know if the funds they’ve so carefully invested in 401(k)s are going to be there for them down the road. Investors of all kinds are worried about wild swings and lingering perils.

Here’s the unnerving thing: No matter how much market enthusiasts hype the stock market’s “efficiency” and hail it for incorporating all possible information, you’re always in for a surprise. That’s because just like death and taxes, you can count on stuff you never saw coming to throw off even the most careful and detailed planning.

Sometimes these unforeseeable events are big ones with massive market consequences. The “black swans,” as they are called, come in the form of terrorist attacks, financial crashes, and yes, pandemics. If an alien delegation lands on the White House lawn, that’s a black swan. These events ask our brains to process a lot of new and complex information. Suddenly old assumptions become irrelevant. New worlds open up.

When we are trying to make sense of things we don’t understand and can’t be certain about, our brains naturally turn to stories. For a long time, scholars in many disciplines, like history, psychology, and anthropology, have understood that narratives are extremely important to people and all that concerns them. Economists, however, have been late to the party. That’s why practitioners like Nobel laureates George Akerlof and Robert Shiller sought to change this by creating a subfield known as “narrative economics” which takes stories seriously and recognizes that they are major drivers of the economy.

The Story-driven Stock Market

In his new contribution to narrative economics, Georgia Southern University economist Nicholas Mangee delves into the link between stories and unrepeatable, unforeseen changes and how they impact the stock market. In his new book from the Institute for New Economic Thinking’s book series with Cambridge University Press, Mangee tracks evidence of narrative dynamics through millions of daily stock market news stories from the last two decades of data, presenting an analysis of nonrepetitive events and associated story elements and how they relate to stock market changes.

Mangee did graduate work under maverick economists Roman Frydman and Michael Goldberg, who helped him to see that 1) unforeseeable change is always happening in financial markets and 2) mechanical ways of thinking that dominated traditional economics were inadequate to understand it — namely the assumption that the future follows mechanically from the past.

He knew that radical uncertainty has to be taken seriously.

Mangee saw that when it comes to the stock market, uncertainty and ambiguity are at the very core, which is why investors are all about stories. His dissertation work on financial news analytics convinced him that the factors driving stock prices are always changing over time, and nobody really knows which of them will matter the most to investors.

In a recent discussion, Mangee gave an example of just-released jobs numbers: “They blasted past expectations, but is that really bullish? Or is it potentially bearish because it confirms for some people that the Fed will tighten and rates are going to come up by more than they expected? Even when you have news that is scheduled, like jobs numbers released by the BLS, it’s not clear how the market is going to interpret that. Context matters.”

The core question in Mangee’s work concerns the degree to which the story threads that investors rely on and perpetuate over time help them deal with unforeseeable change and the uncertainty it engenders.

As he explains in his book, black swans draw people to stories and produce emotional reactions. Our emotions then get mixed into the kind of thinking Mangee refers to as “cold calculation” as we try make sense of what’s going on. Our brains buzz with questions: How will people behave differently? How will companies do business? What government policies can we expect? How we will live during and after the event? Rational sentiment helps reasonably shape answers to these questions in terms of current information and the reality that change is unfolding in real-time.

Mangee points out that just a few weeks after the coronavirus took off, the stock market lost a giant chunk of its total value, erasing the gains of 2019 and bringing a decade-long bull market to a screeching halt. Stories also quickly came into play, fueled by comparisons to history, personal judgment and prior experience, and scary emotions like panic and anxiety. People opened their inboxes to media stories like, “Panicked Shoppers Empty Shelves as Coronavirus Anxiety Rises” (NYT), which reflected, and helped generate, the stories that they latched onto.

“Narratives are the currency of uncertainty,” Mangee writes, and key to how we view the world in uncertain, changing, times. With this insight in mind, he created a new model of stock market instability under situations where we can’t measure the odds of a certain outcome (what economists call “Knightian uncertainty” after influential economist Frank Knight). His “Novelty-Narrative Hypothesis” (NNH) offers a way to understand the stock market that standard economics has missed.

Stories for survival

Stories emerge not only in response to the big black swans but also to smaller unforeseen events like supply chain snarls and corporate legal issues. Even a product recall or a bankruptcy can create enough uncertainty and ambiguity to spark stories. These “novel corporate events,” as Mangee calls them, can impact the bigger trends and vice versa, in a processes too complex for our brains to deal with. So investors turn to narratives as a survival tactic, a defense mechanism, and a tool for making a satisfying decision when faced with limited information and Knightian uncertainty. Stories fill in the gaps, and, as Mangee points out, turn our emotions into cognitive guideposts and anchors when we’re dealing with the meaning of novel events for future stock returns.

We’re continuously dealing with novel events. Mangee notes, for example, that two-thirds of events identified in news reports as important to corporate prospects and share prices are “unscheduled,” as are four-fifths of big events in the U.S. economy. Instability and uncertainty are everywhere. All the time. Every day.

Some stories are flexible. Others are more rigid. Some are based on pretty good information. Others are not. They reflect our prior beliefs about how things work, and they reflect our culture, societal norms, and the popular zeitgeist. Some economists, like Shiller, have looked at the negative side of stories and how they drive us to do illogical things. Shiller scrutinized “narrative epidemics” and how stories are connected to cognitive disorders and conspiracy thinking.

Mangee has a different take. He explains that unlike Shiller, he doesn’t treat stories as stuff outside the stock market emanating within a few people’s minds, but rather a fundamental part of what the stock market is all about. He emphasizes that it’s perfectly rational, normal, and actually necessary for people to engage with stories when there’s uncertainty and ambiguity. Just because emotion is involved doesn’t mean that the stories will steer us wrong, Mangee stresses.

As Mangee sees it, traditional economists have tended to misunderstand how humans make decisions, holding the view that emotion and cold calculation are necessarily at odds. But he (like scholars from many other disciplines) holds that both are both perfectly rational and necessarily interdependent.

Mangee points out that capitalism produces profit –- and loss -- through unanticipated change. “You can have knowledge and be skillful and roughly right,” says Mangee, “but you cannot know what precisely right looks like ex ante.” He says that when looking at the stock market rollercoaster currently underway, we can think of each moment in time as a node of intersecting highways of narratives concerning events that are not routine. “So you have a stock market correction of 10%. What does it mean? The Novelty-Narrative Hypothesis says that we have to take seriously that each and every day events are happening that are not perfect replicas of the past. We’re still learning about what omicron did and didn’t do to the economy, for example. The past doesn’t predict the future in a mechanical way.”

Mangee’s work suggests that ordinary investors need to diversify much more than they’re already allowing. Just holding the broad stock market doesn’t cut it. “There are too many macro shocks, so you need to be represented in more asset classes than just the S&P 500,” he says. “You need high and low yield bonds; high-cap, mid-cap, low-cap value stocks; high-cap, mid-cap, low-cap growth stocks; international, and so on. The S&P500 is dominated by high-cap. That’s not enough diversification.” Mangee’s work reminds us of how volatile financial markets can be.

His work also makes it clear that when we hear anyone making economic and financial forecasts, we need to keep in mind the limitations of those forecasts. “The recognition of those limitations should almost outweigh what the modelers are saying in their predictions,” says Mangee. “We have to give up precision but we can allow for more nuanced relationships and, importantly, for the novelty of real-world change. People don’t like that tradeoff, scientifically. They don’t like the idea that they can’t apply an objective probability distribution to something before the fact.”

Lastly, Mangee’s emphasis on the importance of narratives steers us to scrutinize our own and those of our communities. “Reality for an individual can depend on contextualized meaning of the world around us,” says Mangee. “You interact with this meaning, and the reality you shape depends on your training, your experience, your culture, your generation, your family -- it’s all related.” It might behoove us to remind ourselves, especially when we’re pointing the finger at someone and saying “Oh, look, that silly person over there is making an emotional decision,” that we all make decisions based on emotion, whether we admit it or not. And that’s not a bad thing – we couldn’t deal with the unforeseeable future otherwise.

Perhaps the best way to approach the future in the face of uncertainty is with a strong dose humility. And beware of under-diversification!

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Beyond Price Caps: A Regulatory Framework for Pricing of Medicine Innovation

Drug prices and corporate profits

The United States is unique in its failure to regulate pharmaceutical drug prices. The nation’s households pay on average over two and a half times as much for prescription medicines as their counterparts in other OECD countries. In 2018, pharmaceutical spending totaled $1,229 per capita in the United States, compared to, for example, $884 in Germany and $865 in Canada. Congressional complaints that U.S. drug companies engage in price gouging go back to the 1980s, but Americans are still waiting for significant legislative remedies.

The unregulated monopoly over the determination of prices that U.S. society currently grants the pharmaceutical industry has devastating consequences for many U.S. households, particularly those that are uninsured. Despite an overall reduction in the number of uninsured Americans following the introduction in 2010 of the Affordable Care Act, in 2019 26.1 million people—eight percent of the population—were not covered by an insurance plan at any point during the year.

The Biden administration has pledged to make drug prices more affordable as part of its signature Build Back Better agenda. Biden’s plan includes three key policy reforms: i) permitting Medicare to negotiate with manufacturers prices of a list of specific drugs; ii) penalizing companies that raise prices faster than inflation for Medicare Parts B and D; and iii) introducing price caps on patients’ out-of-pocket costs. Even if these reforms are enacted, they will have been watered down to win the votes of some Congressional centrists. Gone, for example, will be the original proposal to empower the government to negotiate the list prices of the 250 single-source brand-name drugs on which Americans spend the most. These drugs include insulin analogs, which saw price increases of 252 percent between 2008 and 2017 across the three manufacturers that dominate the U.S. market.

Those challenging the proposed reforms have argued that federal intervention to reduce drug prices would adversely affect investment in drug innovation because companies would have less profits to fund drug development. That high profits are needed to finance drug investment is a well-known pharmaceutical industry claim—and it is no coincidence that a number of the Congressional Democrats who have resisted drug-price reform have been among the largest recipients of campaign donations from the pharmaceutical industry.

We define drug innovation as the generation of a medicine that is both higher quality (safer and more effective) and lower cost (more accessible and affordable) than those previously available for a specific medical condition. As we show in our new Institute for New Economic Thinking working paper, “Pricing for Medicine Innovation,” the argument that drug companies need profits on existing products to finance the next round of innovative medicines may have merit in an economic system that relies on business corporations to develop, manufacture, and deliver drugs. But that is precisely why the public requires regulation of drug prices: Business corporations should not unilaterally decide how high drug prices should be to generate the amount of profits that innovation purportedly requires.

Drug-price regulation is needed both to set the amount of profits that are potentially available for corporate reinvestment in innovation and to ensure that a pharmaceutical company actually allocates those profits to the development, manufacture, and delivery of innovative medicines. Given the investments by government agencies and scientific communities in drug development that precede and make possible value added by an innovative pharmaceutical company, it makes no sense to leave the setting of the product price solely to the business firms that market, insure, and sell the drug. Working on behalf of American households, a government agency, which we would call the Pricing for Medical Innovation (PMI) regulator, must be directly involved in the negotiations that set the drug price.

Unregulated drug pricing in a financialized industry

Research has shown that the status quo absence of pricing regulation in the United States is not associated with higher investments in research and development but rather with value-extractive financial practices that undermine innovation. As egregious examples of the predatory value extraction that occurs throughout the U.S. corporate economy, major U.S. pharmaceutical companies have been allocating their profits to cash dividends and stock buybacks at the expense of drug innovation. These same companies price gouge patients for the sake of higher profits that can be used to pump up stock yields. The stock-based compensation of U.S. corporate executives incentivizes this anti-innovation behavior, as does pressure for strategic control over corporate resource allocation applied by hedge-fund activists.

Especially in the current unregulated environment populated by financialized drug companies, the Biden administration needs to be guided by a “theory of innovative enterprise” as it seeks to balance patient access to affordable drugs with its stated objective of “mak[ing] sure that market incentives foster scientific innovation to promote better health care and improve health.” Rooted in the theory of innovative enterprise developed by Lazonick and colleagues, our INET working paper outlines how informed drug-price regulation can support the funding of innovative medicines by business corporations while enabling equitable financial returns to those parties, including taxpaying households, public servants, and company employees, who have invested money and effort in the innovation process.

The theory of innovative enterprise as a regulatory framework

The theory of innovative enterprise focuses on the existence and interaction of three social conditions—strategic control, organizational integration, and financial commitment—that enable a business firm to manage the uncertain, collective, and cumulative character of the innovation process. Strategic control requires resource-allocation decisions by corporate executives with the abilities and incentives to invest in uncertain innovation processes. Organizational integration enables people with different hierarchical responsibilities and functional capabilities to engage in the collective learning that is the essence of innovation. Financial commitment sustains the innovation process until its cumulative result is a higher-quality, lower-cost product that enables financial returns.

The development, manufacture, and delivery of a safe, effective, accessible, and affordable medicine is an innovation process. As in all cases of industrial innovation, its essence in pharmaceuticals is the organizational learning that is required to create a higher-quality (safer and more effective) product than had previously been available. The availability of a higher-quality product enables the innovative pharmaceutical company to access a larger extent of the market and, depending on the size of accessible demand for the drug, achieve economies of scale in the costs of development, manufacture, and delivery. It is the existence of a higher-quality product that can reap scale economies to achieve a lower unit cost that permits a drug with a regulated price to generate “adequate” corporate profits while delivering the drug at an “affordable” cost to patients.

The task for a government regulator, guided by the Pricing for Medicine Innovation (PMI) framework, is to negotiate with the pharmaceutical industry concerning the relation between profits that are adequate and patient costs that are affordable. A regulatory system of PMI would require that, first and foremost, the responsible government agency recognize the flaws of the pharmaceutical industry’s various arguments against intervention in pricing. In our INET working paper we summarize and rebut the four main arguments against regulated drug pricing put forth by the pharmaceutical industry and its advocates:

Argument 1. High drug prices are needed so that a pharmaceutical company has sufficient profits to fund future drug development.

Argument 2. Expectations of high corporate profits yielded by setting high drug prices incentivize financiers to make the risky investments needed for drug innovation.

Argument 3. New drugs save patients’ lives and therefore provide value for money, even if they are expensive.

Argument 4. Other actors in the supply chain, and not the manufacturers, capture the higher profits from higher drug prices.

Some proponents of lower drug prices have demanded that the Biden administration exercise “march-in rights” contained in the Bayh-Dole Act of 1980, which encourages the licensing of federally funded research to commercial enterprises. It has been suggested that even by threatening to revoke exclusive licenses, the federal government could get pharma companies to think twice about drug-price increases. But this course of action fails to confront the U.S. pharmaceutical industry’s arguments against price regulation. The federal government would be trying to use march-in rights as a form of competition policy to influence the price of a drug without an analytical framework for assessing whether its actions would actually make the drug in question more accessible and affordable.

The theory of innovative enterprise would enable the PMI regulator to mobilize the facts and challenge the assumptions that underpin the industry’s four arguments against price regulation. Our approach confronts the ideological dominance of the “free market” theories that the pharmaceutical industry often invokes in opposition to price regulation. Quite apart from overcoming the enormous political influence of pharmaceutical money, a drug-pricing regulatory agency would have to train personnel in the PMI approach and gain access to company data on which the regulator’s drug-pricing assessment could be based. It is an understatement to say that the creation of a PMI regulatory agency would be challenging, given the political and economic power that the U.S. pharmaceutical industry currently wields. If, however, “Build Back Better” really seeks to chart a course toward a more equitable, inclusive, and sustainable America, PMI offers a path forward for that part of the agenda which seeks medicines that are safer, more effective, more accessible, and more affordable.

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Paper: Demography, Inclusive Growth and Youth Employment in Africa

Introduction: Growth policies have not been very inclusive and do not create jobs for young people.

For the past twenty years, growth policies in African countries have shown economic growth rates of between 5% and 9%, leading some economists to call Africa the “new growth frontier” and characterise it as a space of “new strategic interest” (Benhida, 2015). While some might question the quality and credibility of these statistics to measure real economic performance (Jerven, 2013), they remain the compass points for public development policies and indices of the attractiveness of certain countries. The emergence of a middle class (a heterogeneous and notoriously difficult group to define) is regarded as a sign of a nascent “real domestic market” and “growing demand for goods and services” – the stuff of investors’ dreams (Loison, M-H. 2012, p. 4) and a potential new investment pole for growth and job creation in the eyes of development agencies. But the expected effects of this much-heralded economic growth rarely materialise, and most multilateral partners have come to the same conclusion: that this growth does not have the capacity to create jobs.

The African Development Bank (AfDB) reports that “recent high growth rates in Africa have not been accompanied by increased job creation” (African Development Bank, 2018. p. 43). The same report (2018, p. 46) also notes that the countries with the highest economic growth rates have actually created fewer jobs than countries that have grown more slowly. According to AfDB calculations, the elasticity of expected employment growth[1] needs to average at least 0.7 for GDP growth to have a positive impact on employment and labour productivity. Most African countries span a wide range from 0.41 and 1. Based on aggregated World Bank (2017) and ILO (2011) data, which has been taken from a sample of forty-seven countries, it is assumed that an elasticity of 0.7 would ensure labour productivity growth had an impact on poverty reduction. The data show in practice that only “six African countries (Senegal, Congo, Malawi, Niger, Benin and Mauritania) have elasticity close to 0.7; twelve others have higher employment elasticity (Côte d'Ivoire, Cameroon, Mali, Gambia, Guinea Bissau, Burundi, Togo, Algeria, Liberia, Madagascar, Guinea, Comoros); while the majority of African countries have low employment elasticity (in which GDP growth exceeds employment growth). This is especially true of oil-producing nations, most notably Equatorial Guinea, Nigeria and Gabon. Although low employment elasticity is associated with higher labour productivity, it also means that fewer jobs will be created for a given productivity growth rate” (African Development Bank, 2018, p. 46).

The International Labour Organization report confirms this trend, and also highlights the disconnect between the growing young population in African countries and resulting demand for work, and the inability of economic policies to meet this demand by creating sufficient jobs in the formal sector or favourable conditions for viable self-employment. Generally speaking, unemployment in Africa is widely underestimated due to the poor quality of statistical data, but it is possible to get a rough idea of the youth employment situation from several studies based on compilations of national data. A report on the situation of young people in Francophone Africa produced by the Organisation Internationale de la Francophonie used the actual share of young people in the total unemployed population in Francophone countries in 2017 to show that significant proportions of young people aged 15 to 24 are just as badly affected by unemployment as older age groups (2018, p. 24). For example, 53% of young people in this age group are affected by unemployment in Cameroon, 50% in Niger and 52% in Chad. The ILO report identifies some of the factors behind the unemployment that blights much of the continent, noting that the number of young people (15-29 years) in Africa increased by 22.4% between 2005 and 2015, while the number of non-agricultural jobs only increased by 5.6% over this period (ILO, 2020, p. 32). The data show that growth policies are not inclusive, which raises several questions; while the socio-demographic indicators underline the urgent need to reflect on realistic possible alternative mechanisms to include young people in wealth production and redistribution processes.

This paper will investigate the relationship between demography, youth and employment in Africa and will further reflect on the policy options for inclusive growth and youth employment in Africa.

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How Inequality Leads to Industrial Feudalism

We live in an age of growing inequality, insecurity over future prosperity, and anxiety about employment and opportunities for professional advancement. The concept of Industrial feudalism is a striking way of understanding how this situation arises even as we are offered more consumer choice and markets are liberalized.

Industrial feudalism emerges as industrial society is stratified into relatively closed social classes that are defined in relation to their property or their professions. In effect, that society loses the economic and social dynamism by which capitalism overthrew the hereditary hierarchies of feudalism.

The concept and analysis of industrial feudalism emerged in Polish Marxist discussions of the 1890s in relation to the social and economic hegemony of large industrial corporations. In our new working paper, we extend this idea to the present day by showing how social classes are differentiated by the composition of their property. As the distribution of wealth becomes more unequal, that property, and the credit practices associated with it, eliminate social mobility and thereby recreate industrial feudalism.

The idea of industrial feudalism was introduced by Polish sociologist Ludwik Krzywicki (1859-1941) as a consequence of industrial cartels, with the capacity to stabilize their markets and their profit margins, at the cost of economic and social stagnation and declining opportunities for innovation and social advancement.

Among Krzywicki’s most enthusiastic admirers was the economist Oskar Lange (1904-1965). Lange criticized Roosevelt’s New Deal and Keynesian intervention by arguing that such policies supported the monopoly positions of certain capitalist groups. In this situation the profit of the entrepreneur ceases to be the reward for a willingness to undertake risk and the efficient minimization of costs. It becomes simply a privilege arising out of economic concentration and government guarantee. Financial and industrial feudalism, he thought, was now a system of precisely defined group privileges, divided among social strata as rigid as any in medieval times. In such a society, incentives to progress disappear. More than this, such a society would revive the cultural and political superstructure of feudalism with every kind of discrimination, intolerance, fanaticism, and narrowness of outlook, with the state bureaucracy integrated with the oligarchy of haute finance and big business. Keynesianism, in his view, had to be tied to a progressive anti-trust agenda and full employment.

The industrial feudalism of Krzywicki and Lange regarded entrepreneurship as the source of social mobility. While the scope for entrepreneurship and access to finance clearly affects the rigidity of industrial hierarchies, social hierarchies are distinguished by ownership of more general categories of wealth, that may include industrial capital, but may also consist of household wealth which may be inherited. Concentrated ownership of both industrial and non-industrial property makes the distribution of wealth a factor in the current tendencies towards an industrial feudalism in which differences between social strata are reinforced by an absence of social mobility.

Around the world, after the peak recorded in the early 1910s, wealth inequality followed a downward trend until the late 1970s and has been rising steadily since the mid-1980s. In contrast to income, wealth inequality in many countries was largely unaffected by the global financial crisis in 2007, reaching new heights by the late 2010s. Rising wealth inequality has not been limited to advanced capitalist economies like the UK or the USA. Indeed, with greater openness to capitalist forms of production, increases in wealth inequality have been dramatic in the transition economies in Central and Eastern Europe as well as in China.

Existing literature on the sources of wealth disparities does not explore the social and economic implications of these inequalities for the functioning and the development of capitalism. In our working paper, we develop a new theoretical framework to link the mechanisms of wealth inequalities to diminished prospects for social mobility which recreate industrial feudalism in modern times.

Different social classes own different kinds of wealth. So the returns to owners in different classes differ, and so do the credit practices associated with that wealth. Lack of access to all kinds of wealth prevents upward mobility, but the ownership of certain wealth (which can be borrowed against) helps to avoid downward mobility of property-owning classes.

Social classes are therefore defined by their ownership of wealth as much as by their income. In each class there is a standard wealth portfolio that a household needs to possess in order to maintain its position in that class. For each class there is a floor that prevents a household in a given class from becoming déclassé due to a failure of income. These are made up of the credit practices that households use to prevent their falling into the wealth class below their class. But for each class, there also exists a ceiling which consists of the difference in value between the standard wealth portfolio of that class, and the value of the standard wealth portfolio of the next class up in the wealth hierarchy.

Wealth disparities arising due to developments in the asset markets are shaped by changing macroeconomic conditions, and not by households’ individual characteristics influencing their capacity to save and their investment choices. The case of the subprime crisis in the USA highlights the role that changing macroeconomic conditions and financial sector operations play in determining social mobility through their impact on both the access to and the stability of wealth. While undoubtedly important, saving is only one way through which households accumulate wealth and move along the social ladder. The composition of wealth in terms of access to various types of assets as well as leverage is crucial in understanding the increasingly unequal distribution of wealth because of disparities in capital gains available to a household. Thus, differences in price appreciation for various assets have a substantial impact on wealth inequality.

The floors and ceilings that keep households in their social classes are also affected by the social policies of governments. Welfare state provision, quality public services, and government policies to secure full employment strengthen the floors preventing declines in social class status. Already since the 1980s changes in public policy have increasingly followed financial logics and reflected financial sector interests, with the state transforming public services into tradable financial assets that yield return. In this sense, similarly to what was observed by Lange, in contemporary capitalist economies, the state has become an instrument of particular classes of capitalists, especially rentiers and large business owners. By restricting wealth accumulation capacities for some while simultaneously promoting wealth concentration among others, the state has actively contributed to rising wealth inequalities and limited social mobility.

The paring down of welfare provision since the 1980s has coincided with asset price inflation. In the United States, Great Britain, and numerous other countries where residential real estate markets emerged, the housing market came to be relied upon for emergency credit, and cash flow to pay school fees and for private medical care. This has alienated the property-owning middle class from a welfare state for which that class pays but does not need because it can generate cash flow from property.

Rising asset prices generate a more unequal distribution of wealth by increasing the value of wealth that must be acquired to secure a position in the next wealth class. At the same time, the growing credit possibilities of rising asset values reinforce the floor preventing demotion into a lower social class. In light of asset price fluctuations, diversity and stability of the wealth portfolio, and the credit practices associated with such portfolios, thus have a defining role in both upward and downward movements across classes.

This asset dependence is specific to particular classes because they have different kinds of assets. Different kinds of assets have different credit implications and practices associated with them and these different credit implications and practices may ease cash flows in particular classes to prevent downward social mobility. But increasing asset inequality makes upward social mobility more difficult. In this way asset inflation and growing wealth inequalities restrict social mobility and give rise to industrial feudalism.

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Paper: Regional and Continental Integration in Africa in the Covid-19 Era: New Drivers and Perspectives

Abstract

This contribution aims to provide:

• A review of regional integration in Africa. Presenting the African Continental Free Trade Area (AfCFTA) from the perspective of critical questions, such as complementarity with or substitution for regional integration, and the conditions under which AfCFTA could play a major role in the transformation of Africa;
• Answers to the roles which could be played by major economies, such as Nigeria, Egypt, South Africa, Morocco, and Kenya, in the consolidation of this zone, and a view as to which countries might lose out from AfCFTA;
• An assessment of how Covid-19 is affecting integration efforts, especially for AfCFTA. Has the pandemic meant a more protectionist era for certain countries, in order to counter the consequences of Covid-19?

These three issues are important to examine given the world’s poor image of Africa. The global view of Africa is troubled, catastrophic even (protracted conflicts, endemic diseases, weak economic performance, and a consequent state of extreme poverty). This lackluster situation is further threatened by Africa’s borders being in flux, among nation-states that are a product of colonization, exemplified by Ethiopia, Somalia, and the Democratic Republic of Congo (DRC). These countries offer us a preview of the risks for other African countries if no action is taken to address socio-political crises, contain the spread of endemic diseases, and halt the development of mafia networks around mining and the arms trade. Conscious of their unfavorable situation, African Heads of State - supported by some international institutions - decided once they had gained independence to approach the third millennium with determination, launching a range of initiatives to bring new perspectives to address the troubling context they faced.

The first was the creation of the Organisation of African Unity (OAU) on May 25, 1963, in Addis Ababa, Ethiopia, to fight against excessive Balkanization of the continent. This was followed by the creation of the East African Community by Kenya, Uganda, and Tanzania in 1967.

These initial steps were followed by the creation of more regional organizations from 1970 onwards, such as the Permanent Inter-State Committee for Drought Control in the Sahel (CILSS), the Mano River Union (MRU), the Customs Union of Central African States (UDAC), and the African and Malagasy Union (AMU), all in 1973. From 1975, a number of other regional bodies saw the light of day, such as ECOWAS, SADC, COMESA aimed at creating larger, more viable economies and markets.

The third step involved the transformation of the Organisation for African Unity (OAU) into the African Union (AU), in 2000, at Durban, South Africa. This evolution, although considered utopian in certain international circles, became necessary as the OAU had become increasingly redundant given its principal goal had been the decolonization of the Continent, which was achieved with the independence of Namibia in 1990, the end of apartheid in South Africa in 1991, and the pathway to autonomy for South Sudan in 2011.

The fourth initiative was the creation of the New Partnership for Africa’s Development (NEPAD) in July 2001 in Lusaka, Zambia. In spite of a tentative start, this project - a fusion of the Millennium Partnership for African Recovery (MAP) and Project Omega - benefitted from the special interest shown by many big powers, being given a platform in Canada in June 2002 and becoming the subject of many global publications. However, despite the enthusiasm, NEPAD has been unable to achieve its objectives thanks to the financial crisis of 2008-2009 which brought down banks around the world and made it very hard to mobilize the money needed to get NEPAD’s activities underway.

NEPAD is now the African Union’s Development Agency (AUDA), its creation having been approved in July 2018 at the AU summit in Nouakchott, Mauritania. This decision was adopted at the January 2019 Summit in Addis Ababa, Ethiopia, with a new set of objectives centered on:

• Human capital development (skills, youth, employment, and empowerment of women)
• Industrialization, Science, Technology & Innovation
• Regional Integration
• Trade and infrastructure (energy, water, ICT, and transport)
• Governance of natural resources
• Food security

The creation of the African Continental Free Trade Area (AfCFTA), which was finalized in Kigali, Rwanda, on March 21, 2019, by African Heads of State is part of the several initiatives noted above.

The contribution made by this paper will take into account only those initiatives aimed at regional integration and free trade, as they represent the drivers and challenges of Africa today. Among these drivers, we could highlight increasing digitalization of societies and economies; the link between global warming and a set of new risks (emerging diseases, such as Covid-19); emerging tensions between USA and China as a new element in global structures; the unclear role of new and emerging powers in global governance, stability, and conditions for global peace; and the structural challenges facing Africa in affirming its place in global geopolitics, in the light of current narratives referring to it as the ‘new frontier’, a peripheral player, and its dependence on others.

Taking into account these drivers, our analysis will be structured in three parts:

• assessing the current situation with regional integration in Africa;
• examining AfCFTA and the future of regional groupings in Africa;
• investigating the impact of Covid-19 on regional and continental bodies in Africa.

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Fable of the Squirrels: New Research on Wealth Inequality Among Animals Sparks Debate on Human Economies

Can we live by values of mutual aid and the sharing of resources, or are we destined for heavily stratified inequality? As long as there have been economies – and one-percenters benefiting from their design -- there have been arguments about the “naturalness” of unequal conditions. We’re selfish creatures, so the argument goes, and some of us will just naturally be better off. Suck it up.

A flurry of articles concerning a December 2021 study in the journal Behavioral Ecology featuring new insights into intergenerational wealth and inequality in the animal world has ignited a new round of debate on this ancient topic.

Researchers found that among beasts, it pays to be born into privilege. Certain squirrel mothers who hoard nuts and pine cones, for example, will end up bequeathing food stores to a few of their offspring, thus upping their chances of survival. “Red squirrels are born with a silver spoon in their mouths,” quips the New York Times. High-ranking hyenas are able to pass on status to daughters (they’re matriarchal, those clever hyenas), who inherit the right to the best meat, while some monkeys obtain tools to crack nuts from their parents, giving them extra advantage.

The Times article is quick to state that the researchers were prompted to study the topic out of concern about increasing inequality during the pandemic and simply wanted to see what humans could learn about the topic from nature rather than justify intergenerational wealth.

But it is kind of interesting that this particular bit of research has proven popular with the World Economic Forum (WEF), that august group of global elites which gathers annually in the tony ski resort of Davos (the physical gathering has been postponed this year due to Covid) to tell the world what’s what with the economy. An article sponsored by that body asks readers to consider the clownfish. The clownfish, it turns out, can inherit the right to hiding places from its parents, thus enabling it to avoid predators that snack on less privileged fellows.

Could it be that the clownfish teaches the wisdom of the proposition, “I am privileged, therefore nature must have intended it”? Let’s investigate.

Bees do it. Or do they?

Back in the early Enlightenment, when it was de rigueur for intellectuals to propose theories about the hows and whys of things, Anglo-Dutch philosopher and political economist Bernard Mandeville got to thinking about animals. He found himself in agreement with René Descartes’ (spectacularly wrong) view that animals were little more than physical machines: a cuckoo bird and a cuckoo clock were much the same, only one you don’t have to feed. They’re mindless automata.

Turning his attention to bees, Mandeville penned a satirical poem known as, “Fable of the Bees: or, Private Vices, Public Benefits,” in which he describes the breakdown of a bee community when its members suddenly stop acting in their greedy self-interest and become honest and virtuous. The moral lesson: personal vice translates into public good.

Mandeville advised people to hang up the effort to benefit others or control their passions because it just gets in the way of the state’s commercial and intellectual progress. After all, the circulation of capital demands that people keep buying stuff they don’t need, and it’s therefore critical for people to be greedy and self-absorbed if you want to have a thriving economy. “Luxury Employ’d a Million of the Poor,” asserted Mandeville, “And odious Pride a Million more.” Without vices, people just collapse into an apathetic stupor. Greed is good, the more vicious, the better.

Mandeville’s bee poem created quite a buzz. Revered ever since by the most extreme free-market fundamentalists, despite the fact that the author actually understood precious little about the species he touted as an example to humans. Turns out that bees are highly cooperative creatures, and their communities would collapse if they were unable or unwilling to help each other. The very opposite of what Mandeville argued.

Mandeville’s dim view of human beings as deceitful, mean-spirited hoarders drew its fair share of detractors. Even Adam Smith felt that the philosopher had gone rather too far. Smith declared in his Theory of Moral Sentiments that “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” Smith also argued that without regulation, corruption and vice would destroy economies rather than help them thrive.

Smith intuited that reducing all human motivation down to egotistical drives ignores our complexity – and much of what makes us thrive, like empathy toward our fellows. Modern researchers have noted that as early as infancy, humans show empathy towards others in distress. A six-month-old baby will get upset to see someone being bullied -- and it’s clearly not due to receiving an egotistical hit from exhibiting concern, as some cynics have argued is the only reason we demonstrate care for our neighbor.

Researchers have also found ample evidence of the advantages humans enjoy living in communities that feature mutual support and shared resources. A recent book by the late anthropologist David Graeber, The Dawn of Everything, presents a plethora of examples of such societies going all the way back to the Stone Age.

Nature is brimming with diverse strategies for survival – some we might wish to imitate, and some we would not. The famous ichneumon fly, for example, has hit upon an ingenious way to ensure the survival of its offspring. It lays eggs on another creature’s body and paralyzes it so it can’t move while slowly being eaten alive. Hey, no judgment on the ichneumon, but we probably don’t want to follow its example.

Researchers have also found lots of cases in nature of animals other than bees that survive by cooperating and sharing. Certain parrots, for example, share knowledge about available food with other parrots. Vampire bats will share food with a hungry fellow bat by barfing into its mouth (gross, but effective) and bonobos, those monkeys beloved for their hippie penchant of preferring sex to violence -- and also matriarchal -- will happily share their chow with friends.

Some animals will even die to protect members of the group, like honeybees. On the other hand, the female praying mantis dines on her mate’s head after copulation, so again, you have to be careful about choosing your examples!

Even if you pick out a hundred cases of animals hoarding resources to privilege themselves and their own offspring, you still have to be mindful of extrapolating the behavior to human societies. That’s because alone among animals, we actually have choices about how we organize ourselves. We get to decide what way of living suits us best.

Here’s something you’re not going to find in the animal world no matter how hard you search – communities that destroy themselves altogether through hoarding. Researchers have yet to identify a Squirrel Gilded Age with gold-encrusted pinecones and fluffy-tailed robber barons. That’s because squirrels don’t have access to two things that humans have: armies and legally protected engines for unlimited capital accumulation.

In the human world, the wealthy are often able to seize control of political systems and use force to protect their privileges, resulting in economies so grotesquely unequal that they threaten the survival of everyone. In the human Gilded Age, we didn’t just have a few parents passing down advantages to some of their kids. We had a sweeping, systemic foul-up of wretched tenements and children huddling in dirt right next to luxury castles built by industrial gazillionaires. The result? The Great Crash followed by the misery of the Great Depression, which even took down quite a few of these gazillionaires. It was the reverse of Mandeville’s bee model.

The fact is that when humans operate on the principle that greed is good, they usually end up creating extremely unstable economies vulnerable to disruption and collapse. As Thomas Piketty has shown, when the rich are able to fatten endlessly through unregulated capitalism, they will drive inequality higher and higher until finally either some bloody catastrophe happens to blow the whole thing up, or a sane government steps in to create more equal and stable conditions. We are currently in the midst of figuring out which way we would like to go this time around: a violent or peaceful transition to something more equitable. (Check out Institute for New Economic Thinking Research Director Thomas Ferguson’s coauthored recent paper to see how this is going).

Fortunately, there’s good news: Unlike squirrels, humans can, and often have, built societies in which there are limits to how much one can hoard and curbs on how badly one can treat one’s neighbor. We have altered our world so that we can overcome diseases, and we can arrange it so that none goes without access to a doctor, too. Humans are a piece of work worthy of Shakespeare’s praise: noble in reason, infinite in faculty. We don’t crap in public, and we don’t need to throw each other to the wolves. Mandeville’s bees are far from the be-all and end-all that free-market fundamentalists thought they were. Beasts make a few choices; humans can make many more.

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